All Yahoo’s spending can’t make it cool again

FORTUNE -- Yahoo's $1.1 billion acquisition of Tumblr looks like an expensive and misguided attempt by chief executive Marissa Mayer to somehow make the Web 1.0 company "cool" again. Instead of innovating her way out of the mediocre corner of the Internet in which Yahoo currently resides, the former Google executive has instead decided to take the company's debit card and go on a shopping spree, snapping up 10 companies in less than a year on the job. Tumblr is by far the most expensive bauble she has picked up so far and could prove a dud over the long term given its questionable content, much of which is "NSFA" -- Not Safe For Advertisers.

When Mayer took the helm at Yahoo (yhoo) last year, investors were ecstatic. The company had been on a listless voyage over the previous decade as it struggled to move from awkward adolescence into adulthood. Ms. Mayer's appointment gave investors hope that Yahoo could somehow be pulled back from the brink of technological irrelevance. She was seen as a bright star equipped with the magic Google (goog) touch that would, hopefully, help restore Yahoo's rusty search engine as well as the hodgepodge of companies it acquired over the years.

Mayer's star power is undeniable. Yahoo's stock is now up around 70% since her appointment to the top job in July of last year. This is despite the fact that Yahoo's core earnings have remained relatively flat and that it has continued to lose ground in search, moving from a 13% market share last summer to around an 11% share in the first quarter of this year, according to data from comScore (scor). Much of the company's earnings per share growth in the past year has come from stock buybacks, paying less in taxes and cost-cutting measures instituted by its former management team.

Most of Yahoo's value derives from its two core Asian assets, Yahoo Japan and the Chinese internet bazaar, Alibaba (much of which the company sold off last fall to pay for a big stock buyback). After slaughtering the Alibaba cow to give a lavish feast to its starved shareholders, Yahoo needs desperately to replenish its earnings. Mayer rightly believes that Yahoo should be doing more to expand its presence on the mobile web. Studies show people are increasingly turning to their phones and tablets to access the web instead of the traditional desktop or laptop. Mobile web advertising spending in the U.S. is expected to explode to around $4 billion this year, up 72% from last year, according to eMarketer.

So far, Mayer has snapped up 10 mobile-centric app companies in the past year, paying a few million dollars for each of them. While mobile is the way of the future, the company's approach has faults -- namely, backlash. For example, dolling out $30 million in cash for Summly -- an iPhone app made by a teenager that has no revenue -- was greeted by Silicon Valley with derision.

Now comes Tumblr. At $1.1 billion, it makes Yahoo's other purchases look like rounding errors. For those who aren't teenagers, fashionistas, tech geeks, or porn aficionados Tumblr is a "microblogging" site where anyone can post pretty much anything they want. But Tumblr is more than just a big web hosting blog site, like Google's Blogger -- it has a true community of core users who spend hours upon hours reading, posting gifs (moving pictures), and "reblogging" each other's posts to their own personal Tumblrs. It's easy to set up, has a clean interface, a young user base, a hoodie-sporting founder, a decent mobile presence, and lots of "sharing" -- the perfect Web 2.0 brew. It also has scant revenue, unrealistic revenue goals of $100 million this year (it made around $12 million last year), and a management team that thinks advertising sucks.

To be fair, Tumblr does have some impressive user statistics. Around 117 million visitors stumbled upon one of Tumblr's 108 million blogs in April, according to comScore. That added up to 16 billion monthly page views according to Quantcast. Unfortunately, Tumblr doesn't release any analytics, even to its own blogs, so it is really tough to figure out how widespread the community is at this point or what genre of microblogs command the most attention and value. It has a strong following in the fashion community because it is pretty easy to post and repost pictures -- not as easily as some of its competitors, like Pintrest, but easy nonetheless.

What should disturb Yahoo shareholders is the company's track record when it comes to trying to monetize its content. For example, in 2011 at New York's Fashion Week, Tumblr tried to get advertisers to spend a ridiculous $150,000 to $350,000 on banner ads, causing an uproar across the advertising community. It also tried to pimp out popular Tumblr fashion bloggers, offering advertisers special alone time with them for a mere $10,000. Most troubling? Tumblr's track record when it comes to mobile advertising: It has none. The company only started advertising on the mobile web last month in a limited beta test.

Why would Tumblr's venture funders, which include the likes of Sequoia Capital, Spark Capital, Union Square Ventures, and Greylock Partners, agree to sell the company the second it started to monetize its content? With all those impressive stats on page views and unique viewers it sounds like Tumblr could be a goldmine, right? Well, that all depends on whether advertisers actually want to be associated with Tumblr. Indeed Tumblr has a secret -- it is a virtual warehouse for mountains and mountains of porn. Tumblr allows people to follow and create very specific prurient subgenres. A great deal of Tumblr porn appears to be illegally lifted from other websites and posted without the permission of the copyright holders.

Porn draws in a lot of eyeballs, but advertisers refuse to be associated with it. It is unclear what Yahoo will do with all the Tumblr porn. Take it away and chances are those page views and visitor numbers will fall. Keep them up and the company will be exposing itself to a number of copyright lawsuits and will cause advertisers to run as fast as they can in the other direction. Of course, Google's acquisition of YouTube presented some similar challenges that have, more or less been worked out. Any big acquisition carries risks.

The bottom line? Yahoo could have been smarter about how it paid for the deal. It should have hedged its bets and paid with a mix of cash and stock that vested overtime. That's what Facebook (fb) did when it acquired Instagram for the headline number of $1 billion. It paid with $300 million in cash and $700 million in Facebook stock -- stock which has collapsed in value since the company went public last year. That was smarter than paying all cash because it linked Facebook’s success to the value of the asset.

Mayer has talked a great deal of how she wants to make Yahoo an innovative company again. This move could very well end up being that smash success she needs. For now, shareholders still believe she has enough of that Google fairy dust in her pocket to turn the company around. But Mayer shouldn’t test their patience.